UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996.
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number 0-15512
ALPNET, INC.
(Exact name of registrant as specified in its charter)
UTAH 87-0356708
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4460 SOUTH HIGHLAND DRIVE, SUITE #100, SALT LAKE CITY, UTAH 84124-3543
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (801) 273-6600
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
The aggregate market value (based on the average closing bid and ask
prices of the Common Stock as reported by the Nasdaq Stock Market on March 14,
1997) of the voting stock held by non-affiliates of the registrant as of March
14, 1997, was $18,400,679.
The number of shares outstanding of the registrant's Common Stock as of
March 14, 1997, was 18,536,196.
DOCUMENTS INCORPORATED BY REFERENCE
Listed below are documents from which information is incorporated by
reference herein, and the Parts of this Form 10-K into which such incorporation
by reference is made:
Definitive Proxy Statement dated March 31, 1997 - Part III of this Form 10-K.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
FORM 10-K
ITEM NO. NAME OF ITEM PAGE
<S> <C>
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
SIGNATURES
</TABLE>
PART I
ITEM 1. BUSINESS
(A) GENERAL DEVELOPMENT OF BUSINESS
ALPNET, Inc. is a United States publicly-owned multinational corporation which
was incorporated in the state of Utah in 1980. The Company provides language
translation, product localization, and multilingual publishing services to
businesses engaged in international trade.
The Company has several foreign subsidiaries, all of which are wholly-owned.
Most of the foreign subsidiaries were acquired in 1987 and 1988, although in
1994, the Company began to expand its presence in foreign markets through the
formation of additional foreign subsidiaries and branches of ALPNET, Inc. As of
December 31, 1996, the Company has foreign subsidiaries or branches in the
following countries: Canada, United Kingdom, Ireland, Germany, France, Spain,
the Netherlands, Belgium, Hong Kong, Singapore, Korea, China and Japan. The
Korean branch of ALPNET, Inc. was formed in 1994. ALPNET Ireland and ALPNET
China were formed in 1995 and ALPNET Netherlands and the Japan branch of ALPNET,
Inc. were formed in 1996. The Company's Switzerland office was closed effective
December 31, 1996.
The Company believes that it is the largest publicly-owned dedicated supplier of
worldwide translation and product localization services in the world. The
Company provides its clients with language translation, product localization,
language interpreting, language training, and multilingual desktop publishing
and printing services. The Company combines advanced technology and the
essential expertise of the professional translator to provide a full spectrum of
services to fulfill the multilingual publishing needs of clients in
international business.
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENT
The Company operates in one business segment: language translation and related
services.
(C) NARRATIVE DESCRIPTION OF BUSINESS
GENERAL
The Company provides a full range of language services specifically tailored to
clients engaged in international business. ALPNET translates printed and
electronic product information, brochures, operating manuals, schematics,
maintenance manuals, training materials and a host of other materials for
businesses engaged in selling products and services into markets where multiple
languages are required. The Company also has specialized capabilities to help
its customers localize the products they sell in foreign markets. This may be
as complex as the localization of software products, or as simple as the
translation of packaging and labels.
The Company distinguishes the services it provides into three main product
lines: localization, documentation and translation. Localization is the most
extensive range of services offered to clients and is primarily offered to
clients in the information technology (IT) market. It is a turnkey service and
it encompasses a complete linguistic, technical and cultural adaptation of
products for foreign language markets. Services included under localization are
translation, glossary development, desktop publishing, printing, graphics, web
publishing, multimedia, creative tasks, authoring, and a complete range of
engineering and software testing activities. Localization requires a high level
of both technical and linguistic skills. ALPNET concentrates the specialized
resources needed for these activities in three "hubs" located in Salt Lake City,
Singapore and Amsterdam. The three hubs act as the project management and
technical management offices for large multilingual projects while the in-
country offices perform most of the linguistic tasks.
Documentation services are offered to a wide range of industrial clients in
automotive, consumer electronics, telecom, financial services, manufacturing and
other industries. It is a complete service for companies that produce product-
supporting printed and electronic documentation and training materials.
Documentation services include translation, glossary development,
desktop/electronic publishing, printing, graphics and web publishing.
Documentation requires linguistic- and graphics-oriented professionals. ALPNET
concentrates the specialized resources and equipment in many of its larger in-
country offices (Montreal, Croydon, Stuttgart), while the linguistic tasks are
performed in-country.
Translation services are offered to diverse clients from all industries. It is
a traditional service for business clients that need the translated text of a
brochure, memorandum, sales presentation, letter, magazine or any other text.
Translation is a stand-alone service rarely involving more than translation.
ALPNET performs translation services through its entire network in 14 countries.
Translations are in most cases outsourced to independently contracted
translators.
In some locations, ALPNET also provides interpretation services for business
meetings and conferences. This service, however, does not represent a
significant share of the Company's business.
While the exact totals are difficult to obtain due to some clients providing
jobs in more than one product line, coupled with the difficulty in classifying
jobs that contain elements of multiple product lines, management estimates the
distribution of sales of the Company in 1996 over the three product lines as
follows: localization - 35%, documentation - 45%, and translation (including
interpretation services) - 20%.
TRANSLATION MARKET
Recent political and economic changes have created and expanded opportunities
for significant increases in international trade. As companies increase their
operations on a global basis, they require marketing, sales and technical
information in a wide variety of languages. Traditionally, translation services
have been supplied by in-house departments, governmental units, commercial
translation agencies and individual freelance translators. While there are
thousands of individual free-lance translators and many commercial agencies, it
appears that all but a handful of operations are too small to effectively deal
with the increasingly complex translation and multilingual publishing
requirements of large corporate businesses.
The Company is well positioned to serve such businesses. Multinational
companies are looking for a new type of service provider to replace the "cottage
labor" that has historically dominated the translation services industry. The
Company has combined its proprietary computer translation technology with the
expertise of traditional professional translators to enable it to obtain a
growing market share in this expanding industry. The Company believes that the
available market is much larger than the combined revenue of the current major
providers and that no one provider accounts for a significant portion of the
commercial translation market.
MARKETING
Coverage in the business press leads to the conclusion that international
business is undergoing fundamental changes, and generally, these fundamental
changes seem to be very favorable for the translation industry. Some of the
main themes in these market changes can be described as follows.
TELECOMMERCE. The information technology industry leads the way to new
distribution channels for intellectual property. Users can download software
and information from the Internet. Catalog companies have followed by offering
their products online via multimedia web sites. Service companies have started
to offer their services online. Electronic banking, teletraining, helpdesk and
even teletranslation services will be generally accepted services within only a
few years. Secure Internet payment procedures and e-cash will complete the
transactions. Telecommerce will take the "middleman" out of the loop and bring
products straight from the publisher or manufacturer to the end-user. This
shift in the distribution model will affect many different industries and should
lead to an increase in the need for documentation and product support.
CROSS BORDER SELLING. There was a time when "multinationals" were viewed as a
group of huge Fortune 500 companies. Today, many medium- and small-sized
companies successfully sell their products in international markets. The U.S.-
based IT companies have seen their international markets grow significantly over
the last ten years and today many of them generate close to 50% of their
revenues from non-U.S. markets. Other industries are also following this trend.
New distribution methods and outsourcing allow small- and medium-sized companies
to reach non-U.S. markets without heavy up-front investments. Today, the
prevailing strategy is to look to non-U.S. markets as separate and additional
sources of revenue, which requires the sequential phase of product localization
in the production and distribution process. The tendency towards similar
releases ("simship") of products for home and foreign markets will lead to a
conclusion that the world is one market. The ultimate requirement the
translation industry is facing is to supply a turnkey multilingual publishing
solution to businesses who compete in this one worldwide market.
GROWTH IN TRANSLATION MARKET. As a result of the rapid internationalization of
business, coupled with the emergence of telecommerce, the translation market is
expected to grow significantly. OVUM, Inc., a market research company,
forecasts a growth of 30% per year over the next five years in the demand for
translation and localization in the IT related market. OVUM projected that ten
percent of the projected market volume of $6 billion in this market in the year
2000 will be shared among only a few of the largest service providers.
CHANGING BUSINESS MODELS. The Internet and the emergence of telecommerce leads
to entirely new business models. Publishers provide low-end features or
information, via the Internet and free of charge, in order to raise market
exposure and to stimulate demand for high-end features or more important
information. The adoption of this model by Netscape caused a revolution in the
software market. Another example of changing business models is the way people
pay for products. The widespread availability of software and information on
the Internet may soon lead to billing on a per usage time basis rather than on a
per product or license basis. Looking ahead, ALPNET may see a shift of its
business model towards a consumer business, where the actual user of products
will pay for product information in the local language, rather than the
publisher.
CO-MAKERSHIP. No one single company can manage the technological innovations of
its products and services, the access to global markets and at the same time
keep up with the speed of today's business developments without partnerships and
alliances. "Coopetition" is a newly invented term which refers to the formation
of cooperative bonds between competitors. "Virtual companies" is a more recent
term that refers to partnerships and alliances created to serve customers or
certain market segments faster and more effectively. "Co-makership" is the term
applied in the service industry to refer to a very close partnership between
manufacturers /publishers and a service provider, or complete outsourcing to a
service provider. The partners or allies combine their core competencies to
produce a better product for one market.
In each of the three product lines of the Company, favorable developments can be
seen as a possible result of fundamental market changes.
IN LOCALIZATION SERVICES, there is a trend towards co-makership. Software
publishers and hardware manufacturers are looking for suitable partners for a
global turnkey solution for their multilingual publishing needs. It has been
estimated that the software industry alone spends at least 1% of its total
revenues of $200 billion on localization outsourcing. On the supply side, there
are only a few localization vendors that can meet the requirements of global
coverage and vertically integrated services. The specialized localization
industry shows accelerated growth, consolidation of demand and supply, and
rising entry barriers. Capability is the number one buying criteria. Capacity
and quality are conditional and price competition is not intense in this
specialized market. There are additional growth opportunities in new value
added services, such as local content generation, multimedia and software
testing, and engineering work. The Company has been expanding its capabilities
in this area very quickly. ALPNET provides a turnkey localization service
including software translation, testing, engineering, creative work and full
international project management. Localization is currently the fastest growing
product line for the Company, and is expected to remain so for the next few
years. ALPNET is considered to be one of the major suppliers in this industry.
Existing clients are maintained and developed through a very intensive and
closely-monitored client service. New clients are found through direct contact
from professional sales staff of the Company, or via industry meetings and
seminars. ALPNET is a founding member of the Localization Industry Standards
Association, and currently serves on its Executive Management Committee.
DOCUMENTATION SERVICES also shows accelerated growth. However, barriers to
entry are not as high as in localization services, and there is more
competition. Documentation services is currently showing a trend towards
electronic or web publishing and software localization. This increasing
complexity of the publishing process will eventually raise the entry barrier.
Products from various industries like the automotive, telecommunications, home
electronics and medical industries are becoming more software driven and the
publishing process requires more technical skills. Another visible trend is the
change in the publishing cycle from single release/many copies (traditional
print) to many releases/single copy (web publishing). The increased frequency
of product releases leads to an increased volume of translation work. The
rapidly evolving changes in product documentation also call for the use of tools
that keep track of changes. The Company's binding factor in the provision of
documentation services is the use of its proprietary Translation Support System
("TSS"), which holds repetitive parts of text and their translations in a
database and allows the translators to focus on those parts of text that are
new. The Company currently works for most of the large automotive companies and
many telecommunications equipment and consumer electronics manufacturers. New
clients are found through teleprospecting and mailings, followed up by direct
contact with potential clients. Existing clients are maintained through
personalized client service. ALPNET is a member of the Automotive Industry
Action Group (AIAG).
TRANSLATION SERVICES are also growing, but this sector is fragmented, with many
small local and regional entities competing with ALPNET s services. The entry
barriers are very low. As a result, price is very often an important buying
criteria, often the most important. The Company offers its translation services
through Yellow Pages in the main cities of important markets like England,
Germany and France. ALPNET believes that in the future, translation services
will be more easily accessed through an online connection. For this reason, the
Company is planning to develop its Language Button and Translation Highway
services. The Language Button is an icon that can be integrated in the user
interface of any software application. Clicking on this icon, the user will get
access to a language services menu including the worldwide translation resources
of ALPNET. The Translation Highway is the Company's Intranet solution. It will
connect all resources and offices of the Company in a network with standardized
tools for project management and document handling. These innovative solutions
will help the Company to maintain and grow its business in this product line
that is subject to more competition. ALPNET has built up experience in
integrating its Language Button in conjunction with online services of third
parties. Based on this experience, the Company believes it can gradually build
up a new and large client base for translation services.
In marketing the services of all three product lines, the Company believes it
has some very strong selling propositions:
GLOBAL COVERAGE. The Company provides a complete range of the most commonly
needed languages through its network of offices in fourteen different
countries in North America, Europe and Asia.
PROPRIETARY TRANSLATION TECHNOLOGY. The use of TSS by professional
translators ensures better quality and higher productivity. The system
keeps track of terminology and parts of text and allows the translator to
translate repetitive information only once, thus ensuring consistent use of
terms and standard phrases. Formatting codes are preserved for later use in
the desktop publishing phase. TSS is being used by translators throughout
the Company's network. TSS helps to improve margins and turnaround time of
projects.
BROAD CAPABILITY. ALPNET provides a broad range of services helping
companies to bring their products to foreign markets and to publish
information internationally.
PROFESSIONAL CLIENT SERVICE. The Company has professional client service
staff employed in multiple locations of its network guaranteeing its clients
professional management of their localization projects and publishing
activities. A client can choose to work through a single point of contact
in the network to manage all its foreign language publishing requirements.
INNOVATIVE STRENGTH. The Company takes a leading role in innovating the
industry and setting trends for new distribution and production methods.
MAJOR CLIENT
Sales to a single client in the computer industry (Compaq Computer Corporation)
accounted for 16%, 17% and 14% of total revenues in 1996, 1995 and 1994,
respectively. Relations with this client are satisfactory and management
believes a significant portion of 1997 revenues will also be attributable to
this client. No other client accounted for more than 10% of revenues in any
year.
MANPOWER
The Company requires both sales and project management personnel in order to
obtain and manage major translation projects. In all geographic locations,
sales is one of the primary responsibilities of the country manager and the
local direct sales personnel. The Company also has project managers dedicated
to specific clients. Project managers are introduced to potential clients as a
part of the sales plan and are vital for obtaining and retaining major
contracts, where the ability to demonstrate the Company's management strengths
can be as important as the quality of translation itself.
BACKLOG
As of December 31, 1996, the Company had a backlog of approximately $2,700,000
of translation and localization services orders compared with a backlog of
approximately $2,100,000 as of December 31, 1995. The increase in backlog in
1996 is primarily the result of an increase in localization projects in the U.S.
COMPETITION
The Company believes competition in the translation market is characterized by
widely differing elements, which reflect the widely differing needs of clients.
At one end of the spectrum, there are small single-site agencies with a
generalist approach that offer services generally limited to translation. At
the other end of the spectrum, there are a few large, multisite companies that
offer turnkey services (more than translation only) and that focus often on
providing "solutions" for specific industries. Between these extremes, there
are all kinds of mixed forms. In comparing ALPNET with the competition, the
Company scores well in a number of key criteria.
SIZE is important in a market that has traditionally been fragmented and that is
still being referred at as a "cottage industry." Translation contracts are
becoming larger, especially where turnkey projects are concerned. Corporate
users want to deal with large capacity service providers. ALPNET believes,
based on available information, it is second in size, in terms of translation-
related revenues, in the rapidly growing global translation market.
SINGLE VS. MULTI-SITE. This is not only a strategic choice, but also an
economic choice. Some companies in the industry seem to have chosen to remain
single-site operations. Others have made failed attempts to set up foreign
offices. Only a few companies have, after two or three years of successes and
failures, built up an international network that seems to work with relative
success. ALPNET has built up its network through a series of acquisitions, new
office expansions and other alliances, and has invested a number of years in
making it work. It is fair to say that developing and maintaining a good
working network of offices is the greatest challenge that translation service
providers face. Single-site multilingual vendors will have more and more
difficulty recruiting sufficient capacity at economic prices. Multi-site
operators are facing the problem of continuously expanding their network through
acquisitions, start-ups or alliances. The cultural challenges of managing
people in relatively small (but heavy people driven) multinational companies
cannot be underestimated either. ALPNET clearly has a head start when it comes
to managing client projects through an international network.
SOLUTION VS. TRANSLATION ONLY. The majority of large translation service
providers were formed when new emerging industries developed an urgent demand
for a complete translation solution to which traditional suppliers could not
respond. The "old" translation agencies still exist, but they do not seem to
grow beyond a certain size. The large suppliers offer solutions to their
clients and list services such as consulting, testing and engineering, printing,
publishing, fulfilment, etc. ALPNET believes an increasingly large part of its
business is moving to a solution-based model. Many projects are however of a
traditional nature, where clients turn to ALPNET because of a mix of capacity,
price and quality. The balanced spread over three product lines (localization,
documentation and translation) makes the Company less vulnerable to the
fluctuations in work volumes that are so typical for the information technology
sector.
OWNERSHIP. A significant number of the large translation companies are closely-
held (with or without participation of a venture capital company) or are
subsidiaries of larger multinational companies. It is typical in the
translation market for the entrepreneur/owner to function as the central
management that controls all aspects of the business, even when the companies
grow much larger and become international in scope. This ownership structure
can be a potential barrier for growth. The entrepreneur/owner experiences
increasing problems in keeping up with ongoing investment requirements, and also
often finds it difficult to adapt to new management models and replicate what
was built up in the "home market." It is to be expected that translation
entrepreneurs will be looking for ways to join forces, buy or sell other
translation companies, or integrate into larger businesses. ALPNET is the only
publicly-owned company in this industry with a worldwide professional management
structure that is not part of a larger corporate structure, thereby giving it
the ability to focus specifically on operations and growth opportunities in the
translation and localization industry.
DEVELOPMENT AND CLIENT SUPPORT
During 1996, 1995 and 1994, the Company spent approximately $226,000, $170,000
and $124,000, respectively, on technology development and support activities.
These reflect the amounts spent on the further development and support of
technology for use within the Company. Management expects an increase in the
level of development-related expenses in 1997 as it expands the services
available to its clients, including on-line capabilities.
EMPLOYEES
As of December 31, 1996, the Company employed 376 persons. Due to the nature of
its business, the Company also retains, on an as-needed basis, a large number of
translators and other service professionals who are independent contractors.
(D) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
SALES
Financial information concerning the Company's foreign and domestic operations
is presented in note 2 to the Consolidated Financial Statements included in Item
8 of this Form 10-K and is incorporated herein by reference.
ITEM 2: PROPERTIES
ALPNET's corporate headquarters are located in Salt Lake City, Utah. Sales and
production facilities used by the Company as of December 31, 1996, are listed
below. All facilities are leased, except for the Company's office in Barcelona,
Spain which is owned and subject to a mortgage which will be paid off in May
1997.
<TABLE>
<CAPTION>
Location Square Feet
<S> <C>
United States
Salt Lake City, Utah 12,700
Other locations 1,300
Canada 14,300
United Kingdom
Croydon (1) 12,400
Other locations 8,000
Germany
Stuttgart 9,900
Other locations 6,000
Ireland, France, Spain, Netherlands, Belgium 10,700
Hong Kong, Singapore, Korea, China, Japan 14,300
<FN>
(1) Approximately 3,000 square feet of the Croydon facilities are subleased pursuant to a contract
expiring in 1998.
</FN>
</TABLE>
ITEM 3: LEGAL PROCEEDINGS
None.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter ended
December 31, 1996.
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
ALPNET's Common Stock trades on The Nasdaq SmallCap Market tier of The Nasdaq
Stock Market under the symbol "AILP." The following table shows the range of
high and low trading prices as reported by The Nasdaq Stock Market for the years
1995 and 1996.
<TABLE>
<CAPTION>
1995 HIGH LOW
<S> <C> <C>
Quarter ended March 31, 1995 $ .38 $.19
Quarter ended June 30, 1995 .44 .19
Quarter ended September 30, 1995 1.47 .28
Quarter ended December 31, 1995 2.22 .84
1996 HIGH LOW
Quarter ended March 31, 1996 $1.81 $1.06
Quarter ended June 30, 1996 3.06 1.31
Quarter ended September 30, 1996 3.22 1.87
Quarter ended December 31, 1996 2.75 1.44
</TABLE>
As of March 14, 1997, there were 458 shareholders of record; however, the
Company estimates the actual number of beneficial owners approximates 4,000. No
dividends have been declared on the Company's Common Stock. The Company is
currently prohibited from paying dividends under Utah corporate law.
ITEM 6: SELECTED FINANCIAL DATA
The following selected financial data are derived from the Consolidated
Financial Statements of the Company. The data should be read in conjunction
with the Consolidated Financial Statements, related notes and other financial
information included herein.
<TABLE>
<CAPTION>
OPERATING SUMMARY
Thousands of dollars, except per-share data
YEAR ENDED DECEMBER 31 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Sales of services $32,338 $26,919 $20,473 $19,459 $19,747
Net income (loss) 596 621 (741) 458 (613)
Net income (loss) per share .03 .03 (.04) .03 (.05)
Cash provided by (used in)
operations 537 1,233 (606) 371 (130)
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL SUMMARY
Thousands of dollars and shares
AS OF DECEMBER 31 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Working capital (working
capital deficiency) $ 2,349 $ 2,200 $ 1,187 $ 125 $ (633)
Total assets 17,267 14,449 13,223 12,743 12,233
Long-term debt, less current portion 262 220 533 1,314 2,156
Shareholders' equity 10,355 9,331 7,177 6,089 5,146
Shares of Common
Stock outstanding 17,883 16,199 15,562 15,562 12,562
Common Equivalent Shares of
Convertible Preferred Stock
outstanding 6,187 7,423 6,637 1,378 1,378
</TABLE>
A majority of the Company's operations are in foreign countries. Accordingly,
the Company is significantly affected by foreign currency exchange rate
fluctuations. The following table shows what sales and results of operations
would have been for the years presented, had foreign currency exchange rates
remained at 1992 levels for all years.
<TABLE>
<CAPTION>
PRO FORMA DATA
Thousands of dollars
YEAR ENDED DECEMBER 31 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Pro forma sales of services at
1992 foreign currency
exchange rates $34,052 $27,814 $22,423 $21,533 $19,747
Pro forma net income (loss) at
1992 foreign currency
exchange rates 701 776 (926) 629 (613)
</TABLE>
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis should be read in conjunction
with the Consolidated Financial Statements and notes thereto.
FOREIGN OPERATIONS
The Company serves its customers from 34 wholly-owned offices in 14 countries.
The operations of the Company are predominantly located outside the U.S.
Accordingly, the Company is subject to the effects of foreign currency exchange
rate fluctuations. For all of the Company's foreign subsidiaries, the
functional currency has been determined to be the local currency. Accordingly,
assets and liabilities are translated at year-end exchange rates, and operating
statement items are translated at weighted-average exchange rates prevailing
during the year. The resultant cumulative foreign currency adjustments to the
assets and liabilities are recorded as a separate component of shareholders'
equity. The 1996 foreign currency equity adjustment was positive $186,000
compared to a positive adjustment of $192,000 in 1995. Generally, when the
major foreign currencies affecting the Company strengthen against the U.S.
dollar, the shareholders' equity adjustment is positive since the net assets
denominated in foreign currencies are translated into more U.S. dollars, and
this occurred in both 1996 and 1995. As of December 31, 1996, the cumulative
net effect to the Company of the equity adjustment from movements in foreign
currency exchange rates was a reduction of $1.2 million in shareholders' equity.
A significant portion of the cumulative foreign currency adjustment relates to
changes in the recorded amount of goodwill.
In 1996, the Company recorded total net expenses of $121,000 for realized and
unrealized losses on foreign exchange transactions. Substantially all of this
expense was incurred in the U.K. and a majority of the U.K. expense represented
an unrealized loss related to an unusually strong UK pound as of December 31,
1996. Because the Company's U.K. subsidiary had a large amount of US$
denominated receivables outstanding as of December 31, 1996, the Company
recorded a significant unrealized loss on these receivables. The
strengthening of the US$ against the UK pound in 1997 has meant that a
significant portion of the loss was not realized. In 1995 and 1994, exchange
adjustments resulting from foreign currency transactions which were included
in the determination of net income were not material.
Because most of the Company's operations are located outside the U.S. and its
foreign operations' financial results must be translated into U.S. dollars, the
Company's actual and reported financial results and financial condition are
susceptible to movements in foreign currency exchange rates. Since the Company
has relatively few long-term monetary assets and liabilities denominated in
currencies other than the U.S. dollar, it does not have any ongoing hedging
programs in place to manage currency risk.
RESULTS OF OPERATIONS
The following paragraphs discuss 1996 results as compared with 1995, and 1995
results as compared with 1994, including the significant effects of fluctuating
foreign currency exchange rates.
The Company reported net income of $596,000 in 1996 compared to net income of
$621,000 in 1995 and a net loss of $741,000 in 1994. If foreign currency
exchange rates for 1996 had remained unchanged from 1995, the Company would have
recorded net income of $626,000 instead of $596,000 and therefore currency
exchange rate fluctuations had a small negative effect on reported 1996 results.
In 1995, the Company would have reported net income of $560,000 instead of
$621,000 if currency exchange rates for 1995 had remained unchanged from 1994
levels.
Sales of services were $32.3 million for 1996 compared to $26.9 million for 1995
and $20.5 million for 1994. The $5.4 million increase in reported sales for
1996 consisted of an increase in sales volume of $6.0 million and a decrease of
$600,000 due to currency exchange rate variances. The $6.4 million increase in
reported sales for 1995 consisted of an increase in sales volume of $5.2 million
and a $1.2 million increase due to currency exchange rate variances.
The increases in sales volume in both 1996 and 1995 are due to increases in
sales in nearly all markets in which the Company has a presence, but most
particularly in the Company's North American and U.K. offices. Contributions
from new offices, especially in the Netherlands and in Japan, also boosted sales
in 1996 over 1995.
The increases in sales volume are a result of generally expanding needs for
language related services in an increasingly global marketplace where more and
more businesses are entering foreign markets and becoming involved in worldwide
trade. An example of this is the software industry which has significant and
increasing needs for product localization services such as those provided by the
Company. Also having a beneficial effect on sales levels is the Company's
increasing emphasis on online services (including the Internet) both as a
marketing tool and as a means to communicate with and interact with clients.
Management also believes that international trade agreements such as the North
American Free Trade Agreement (NAFTA) and the General Agreement on Tariffs and
Trade (GATT) have had a positive effect on demand for the language services
provided by the Company.
The Company competes on the basis of capability, quality, service and
geographical proximity to clients and potential clients, and has opened several
new offices and expanded existing offices in recent years in order to increase
its market share in what management believes has been and will continue to be a
growth industry. The intense price competition which the Company encountered
throughout 1994 and 1995 continues to limit the prices the Company can charge in
the marketplace. The industry pricing situation appears to have improved only
marginally in 1996 compared to 1995.
The following table shows a comparison of sales of services in each of the
Company's significant geographic areas for 1996, 1995 and 1994, along with the
effect of foreign currency exchange rate fluctuations on sales between years.
Intercompany sales are normally billed on a margin-sharing basis. All
intercompany sales are eliminated in determining the totals.
<TABLE>
<CAPTION>
Thousands of dollars
Increase (Decrease) Increase (Decrease)
in Sales of Services Total in Sales of Services Total
due to 1996/1995 due to 1995/1994
Sales Currency Increase Sales Currency Increase
1996 1995 Volume Differences (Decrease) 1994 Volume Differences (Decrease)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
United States $ 5,521 $ 2,463 $3,058 $ 0 $3,058 $ 2,360 $ 103 $ 0 $ 103
Canada 4,802 3,860 916 26 942 3,404 461 (5) 456
Europe 25,713 21,864 4,599 (750) 3,849 15,940 4,523 1,401 5,924
Asia 3,788 2,464 1,325 (1) 1,324 1,955 400 109 509
Eliminations (7,486) (3,732) (3,851) 97 (3,754) (3,186) (310) (236) (546)
TOTAL SALES $32,338 $26,919 $6,047 $(628) $5,419 $20,473 $5,177 $1,269 $6,446
</TABLE>
As shown in the above table, every major geographical region reported increased
sales in 1996 and in 1995 over the prior year.
SALES OF SERVICES BY GEOGRAPHIC AREA
U.S. sales grew only 4% in 1995 over 1994, but increased $3.1 million or 124% in
1996 over 1995. In the U.S., sales can fluctuate widely from period to period
due to industry conditions which are often less predictable and stable than
those found in the Company's foreign markets. Such conditions are characterized
by the relative inexperience of many U.S. companies in translation and
localization of language, as it relates to international business, and clients
which may not be sophisticated in the nuances of marketing to foreign countries
and thus unaware of the importance of related language issues. These factors,
along with the unpredictable timing and the nonrecurring nature of many large
translation projects for U.S. companies, results in an order stream which varies
from period to period. In addition, the entrance into the U.S. market of
European competitors trying to expand their revenues has had a tendency to
depress the profitability of work performed by the Company for U.S. clients.
Despite these factors, U.S. sales increased significantly from 1995 to 1996, due
largely to a rise in the number and size of projects for existing and new
clients, especially software localization services for companies in the computer
hardware, software development and computer-based training industries. Much of
this increase is due to aggressive sales and marketing efforts initiated in 1995
and which have continued throughout 1996. Management expectations for the U.S.
are for a general continuation of growth in sales, especially to the computer
and computer-based training industries, but the predictability and timing of
actual orders from clients is uncertain and the high growth rate of 124%
achieved in 1996 is unlikely to be repeated in 1997.
Canada's reported sales for 1996 represented an increase over 1995 of 24% and
1995 sales increased 13% over 1994. The increases in sales in Canada for both
1996 and 1995 were due primarily to ongoing aggressive marketing and sales
efforts, the procurement of new large long-term contracts and increased
international trading. These increases in sales have occurred despite continued
economic and political challenges in Canada, which are still present and which
could eventually depress sales if the economy and the strength of the Canadian
dollar decline or if the political situation deteriorates in the future.
Nevertheless, primarily due to several new large multi-year contracts, which
were negotiated in 1996, but which didn't begin until 1997, management believes
it is likely that 1997 revenues in Canada will exceed 1996 levels.
In 1996, sales in Europe of $25.7 million represented approximately 65% of the
Company's consolidated sales and grew by $3.8 million over 1995 sales levels, or
by 18% year over year. Sales increased in every European country in which the
Company has offices, but most of the increase was the result of a 16% growth
rate in the U.K, which is the Company's largest single market, and in the
Netherlands, which recorded sales of $1.1 million in 1996 but had no sales in
1995. The U.K. and Germany accounted for 84% of Europe's total sales in 1996.
In 1995, sales in Europe of $21.9 million represented 71% of the Company's
consolidated sales and grew by $5.9 million over 1994 sales levels, or by 37%
year over year. In 1995, sales also increased in every European country in
which the Company had offices, but most of the increase was a result of growth
in the U.K. (37% growth rate, of which 33% was actual growth in volume and only
4% was due to the effect of foreign currency exchange rate variances) and in
Germany (45% growth rate, of which 29% was actual growth in volume and 16% was
due to the effect of foreign currency exchange rate variances). Together, the
U.K. and Germany accounted for 89% of Europe's total sales in 1995.
The high rates of growth in sales in the U.K. were due to several factors,
including significantly increased orders from the Company's largest client; a
healthy local economy; the Company's growing reputation for providing quality
service; expansion of sales efforts in all offices, including the smaller
regional offices in the central and northern areas of Great Britain; an
experienced and dedicated management and production team which has been in place
for several years; the growing revenues of the London sales office which was
opened in early 1995; and the expansion of the Glasgow office in late 1995 when
the Company acquired a local translation company to supplement the sales of the
existing office in that city. In January 1997, the Company acquired CompuType,
a U.K.-based company (see note 3 to the Consolidated Financial Statements).
Partly because of the addition of CompuType, management expects sales in the
U.K. to continue to grow, but the actual rate of growth will depend on many
factors which are subject to constant change. In particular, sales in this
country are greatly dependent upon the number and size of orders from large
clients.
In Germany, the economy grew at a mild pace during most of 1995, but slowed
considerably late in the year. This slowdown has continued throughout 1996 and
into 1997, evidenced by the unemployment rate which has increased to post WWII
highs as many companies and industries have reduced employment. Due to the
effects of the overall economic slowdown, the Company's sales in Germany
increased only 5% in 1996 over 1995, but the rate of increase was 10% for the
nine months ended December 31, 1996 compared to the same nine-month period in
1995. The first quarter of 1996 was particularly poor in terms of economic
strength. The significant growth in sales in 1995 compared to 1994 was achieved
primarily by aggressive marketing and sales efforts; a stronger and more
experienced management and production team, especially in the small- to mid-
sized offices; and an emphasis on the Company's electronic publishing
capabilities, an increasingly important part of the language services package
needed by many international businesses operating in Germany. While management
is expecting revenue growth to continue in 1997, the uncertain economic
conditions in Germany will undoubtedly have a dampening effect on the Company's
ability to grow sales.
In addition to the new London office and the expansion of the Glasgow office in
1995, the Company opened offices in the Netherlands and in Ireland in late 1995
and in Belgium in late 1996. The Belgium office will be a high volume, high
quality production facility. The other new offices, along with the investments
made in human and equipment resources in existing offices in recent years, are
expected to help the Company grow its revenues in Europe as demand for language
services in this region continues to expand.
Sales in Asia of $3.8 million in 1996 grew by 54% over 1995 levels, with
essentially no effect from currency exchange rate fluctuations. The Company
expanded its Asian presence in late 1995 by adding an office in The People's
Republic of China and in early 1996 by opening an office in Tokyo. Since its
opening, the China office has functioned only as a production facility for sales
made in other offices of the Company, but China is expected to begin to sell to
local companies in the future and contribute to the growth of sales in Asia in
coming years. The Company's Tokyo office has also served primarily as a
production facility for sales made elsewhere in the Company, and has therefore
helped other offices sell to new and existing clients that have needs for
Japanese language services. Management expects this office to begin selling to
Japanese clients in 1997, which is expected to help further accelerate sales
growth in Asia in 1997. While Hong Kong sales again decreased substantially in
1996, sales in Singapore and Korea increased significantly over 1995 levels.
Hong Kong sales, which were not material in 1996, are expected to decline even
further in 1997, as other Asian offices are now producing most of the Chinese
work historically done by this office.
Asia sales of $2.5 million in 1995 grew by 26% over 1994 levels, with the bulk
of this increase due to actual volume increases and only one-fifth due to
currency exchange rate fluctuations. While Hong Kong's sales decreased as an
indirect result of the uncertainty over the impending political changes in 1997,
sales in 1995 in Singapore and Korea increased over 1994 levels.
Management expects the increased demand for Asian language services to continue
as many Asian countries are experiencing very high economic growth rates and the
interest in Asia from the business communities in the U.S., Europe and elsewhere
remains high.
The Company's business can be impacted dramatically by changes in the strength
of the economies of the countries in which it has a presence, and results of
operations are highly influenced by general economic trends. Moreover, sales
and profitability are increasingly affected by the number and size of larger and
more complex multi-language projects. In 1996, the Company experienced
significant fluctuations in quarterly sales and profitability levels largely as
a result of the increasing number of such projects. Management expects this
trend to continue in 1997, and expects the first quarter of 1997 to produce a
loss, as delays in starting large 1997 projects from several new clients will
defer revenues from the first quarter to the second quarter. Nevertheless, the
Company expects to be able to capture increasing sales in an expanding market
which will result in overall long-term sales growth.
COST OF SERVICES SOLD
Cost of services sold as a percentage of sales of services has fluctuated
primarily as a result of competition in the marketplace and the volume and
nature of direct production costs of project sales in each year, especially
large projects covering several accounting periods. While some relief from
severe price competition has been observed recently, management expects
competitive pricing pressures to continue in the foreseeable future. The Company
is continuing its efforts to contain costs to offset the effects of these
pricing pressures. These efforts include more effective utilization of the
Company's proprietary software on medium- to small-sized projects to improve the
productivity of translators, and the development of stronger "partnerships" with
clients to enable the Company to provide higher margin solution-based services
to clients.
OTHER COSTS AND EXPENSES
Selling, general and administrative expenses were $5.5 million in 1996 and
increased over prior year levels in both 1996 (by 27%, which increase would have
been 29% absent the effect of currency exchange rate fluctuations) and 1995 (by
25%, of which 5% was due to the effect of currency exchange rate fluctuations).
These increases were due to several factors, including the overall growth of
existing offices and the opening of new offices in both years, including Tokyo
which incurred a very high level of start-up costs related to the high cost of
doing business in Japan and the relatively large size of this new office;
increased marketing and sales efforts in all of the Company's markets, including
the hiring of a new corporate vice president of sales and marketing in late 1995
and the publishing of a significant volume of new sales and marketing
materials; certain costs related to reorganizing some of the Company's
underperforming offices, including the closure of the Switzerland office in
December 1996; and to a lesser extent, the effect of increased corporate
overhead costs related to the Company's growth.
Development costs were $226,000 in 1996 compared to $170,000 in 1995 and
$124,000 in 1994. Development costs are related to the upgrading and expansion
of the Company's proprietary language translation software developed in the
early years of the Company's existence, as well as efforts related to the
development and expansion of the Company's online language service product
offering. The Company has enhanced certain features of its software and made it
compatible with more of the ever-increasing types and versions of software being
developed by the software industry which are being used by clients and potential
clients. The Company expects development costs to continue to increase in 1997
over 1996 levels, most notably because of the requirements related to online
services, including the Internet.
Fluctuations in the amount of goodwill amortization resulted primarily from
foreign currency exchange rate fluctuations from year to year.
Net interest expense was $138,000 in 1996. Interest expense decreased by
$55,000 in 1996 compared to 1995 and by $11,000 in 1995 compared to 1994. The
decreases were due primarily to reductions in the Company's average outstanding
debt levels, most notably the conversion of $243,000 of debt to an affiliate to
Convertible Preferred Stock in August 1995, and to a lesser extent, a reduction
in interest rates in 1996 as compared with earlier years. While interest
expense in future periods is expected to increase marginally over recent levels
as the Company has increased its long-term debt to finance certain equipment
purchases, such increases are not currently expected to be significant.
The U.S. parent company and each of its subsidiaries are separate legal and
taxable entities subject to the domestic or foreign taxes pertaining to
operations in their respective jurisdictions. For tax purposes, the U.S. parent
company, and most of its subsidiaries, have unused net operating losses from
prior years which can be utilized to reduce future years' taxable income of the
respective entities. The availability of these net operating losses is governed
by applicable domestic and foreign tax rules and regulations, some of which
limit the utilization of such losses due to minimum tax requirements and other
provisions. Income tax expense as presented in the Consolidated Financial
Statements represents the combined income tax expense and income tax credits of
all of the entities of the Company.
After consideration of the effect of the utilization of net operating loss
carryforwards, income tax expense was $223,000 in 1996, $160,000 in 1995, and
$92,000 in 1994. Fluctuations in the amount of income taxes arise primarily
from the varying combinations of income and losses of the Company's subsidiaries
in the various domestic and foreign tax jurisdictions, including the utilization
of net operating loss carryforwards in many of these jurisdictions. The U.S.
parent company has no net operating loss carryforwards for state income tax
purposes.
Note 6 to the Consolidated Financial Statements, "Income Taxes," contains
additional information pertaining to the computation of income taxes as well as
the Company's net operating loss carryforwards as of December 31, 1996.
LIQUIDITY AND SOURCES OF CAPITAL
In 1996, the Company had a positive cash flow from operations of approximately
$500,000 compared with a positive cash flow from operations in 1995 of $1.2
million and a negative cash flow from operations in 1994 of $600,000. In each
of the years 1996, 1995 and 1994, the Company's investing activities consisted
primarily of the acquisition of equipment needed to maintain or upgrade
production capability.
Financing activities for all years included fluctuations in the amounts utilized
under bank lines of credit used to finance the Company's working capital needs
and changes in outstanding debt used to finance equipment purchases. In 1996
(as well as in early 1997), the Company's non-cash financing activities included
the conversion by certain shareholders of certain of the Company's Preferred
Stock to Common Stock, all as described in more detail in note 5 to the
Consolidated Financial Statements. The Company's 1995 financing activities
included the conversion of $243,000 of debt to an affiliate to a new series of
Convertible Preferred Stock of the Company, the sale of Common Stock for
$194,000, and proceeds of $44,000 from the exercise of employee stock options.
The Company's 1994 financing activities were highlighted by a capital
restructuring effective as of March 31, 1994, whereby approximately $1.8 million
of current and long-term debt to affiliates was converted to Preferred Stock.
Additionally, in 1994, the Company increased its borrowings from affiliates by
$185,000 in order to finance a pension obligation owed to the former owner of
one of its subsidiaries.
At the end of both 1996 and 1995, the Company's cash and cash equivalents were
approximately $1 million. At December 31, 1996, the Company had working capital
of approximately $2.3 million, compared to working capital of approximately $2.2
million at December 31, 1995. The increase in working capital during 1996 was
primarily attributable to an increase in accounts receivable during the year,
most of which was offset by increases in notes payable to banks and accounts
payable.
The Company's primary working capital requirements relate to the funding of
accounts receivable. The Company funds some of its working capital needs with
various lines of credit with banks in Canada, the U.K., Germany and Spain. Most
of the lines of credit are secured by accounts receivable and other assets of
the respective subsidiaries. As of December 31, 1996, the Company had unused
amounts under these lines of credit of approximately $660,000. Also, in January
1997, the U.K. line of credit was increased and a new line of credit was
obtained in the U.S. for a total increase of $670,000 (see note 4 to the
Consolidated Financial Statements) since December 31, 1996.
The Company believes the available amounts under these lines of credit, along
with current working capital, are sufficient to fund the Company's operations at
current levels, as well as enable the Company to grow at a modest level, without
seeking significant new sources of capital. Most of the Company's credit
facilities are subject to annual renewals and the Company expects them to be
renewed on substantially the same terms as those which currently exist. In
addition, the Company expects to be able to increase the maximum amounts which
can be borrowed under credit facilities if the Company's sales increase and if
the Company can remain profitable. Some of the banks which have loaned funds to
the Company's subsidiaries under the credit facilities referred to above, have
placed certain limits on the flow of cash outside the respective countries.
Such limitations have not been an undue burden to the Company in the past, nor
are they expected to be unduly burdensome in the foreseeable future.
The Company has no present significant commitments for capital expenditures,
which generally consist of computer equipment and related peripheral hardware
and software. A lesser but increased portion of expenditures in 1996 was for
office furniture to equip new and growing offices. Likewise, the level of
capital additions in 1996 increased significantly from 1995 due to expansion of
existing offices and the new offices opened in late 1995 and in 1996. Capital
expenditures in future periods are expected to vary according to the overall
growth of the Company, but are not expected to reach the levels experienced in
1996. The Company plans to acquire and place additional translation services
workstations in its offices in connection with future orders from customers, as
such orders are received. The Company expects to finance a certain portion of
future equipment costs through bank and/or leasing sources, similar to the
financing arrangements entered into in recent years.
As described in more detail in note 3 to the Consolidated Financial Statements,
in January 1997 the Company acquired a U.K.-based business for cash of
approximately $550,000, most of which was financed. While there are no current
commitments or plans, the Company may also open additional offices in strategic
locations or pursue other acquisitions worldwide, as client demands dictate and
opportunities arise. The costs to open most offices have generally not been
substantial and have been primarily related to the procurement of computers and
other translation-related equipment and, in certain instances, for office
premises. The Tokyo office was an exception to this general situation, due both
to the larger size of that office and the high cost of doing business in Japan.
The costs of any additional offices to be opened in the future can also be
expected to vary based on size and location and could require certain amounts of
cash beyond the amount that can be generated through operations, depending on
profitability.
The Company believes it has the ability to issue additional equity securities if
necessary, but does not currently have any firm plans to do so. In past years,
the Company has relied on major shareholders of the Company to fund certain
obligations, but the Company has no firm commitments from, nor are there any
obligations of, any such shareholders to provide any debt or equity funds to the
Company in the future. In order for the Company to fund investments beyond
modest growth in operations, such as for significantly new or expanded services
or product lines, additional debt or equity funds will likely be required.
Management believes that current working capital and available lines of credit,
together with management's expectations of increased revenues and ongoing plans
to control expenses, will enable the Company to meet its financial obligations
during 1997. It is more difficult to assess cash flows beyond 1997 and the
ability of the Company to meet its commitments without additional sources of
capital is directly related to the Company's operations providing a positive
cash flow. Should the Company's operations fail to provide adequate funds to
enable it to meet its future financial obligations, management has the option,
because of the Company's organizational structure, to cut costs by selectively
eliminating operations which are not contributing to the Company financially, as
was done by closing the Switzerland office in 1996.
Inflation has not been a significant factor in the Company's operations;
competition, however, has been and is expected to remain a major factor. To the
extent permitted by competition and general economic and market conditions, the
Company will pass on increased costs from inflation and operations to clients by
increasing prices.
Due to prior years' operating losses, the Company and many of its subsidiaries
have net operating loss carryforwards available to offset future taxable income
in the various countries in which the Company operates. As a result, the
Company historically has not had significant income tax liabilities requiring
the expenditure of cash. Due to currently available net operating loss
carryforwards, the Company expects this general trend to continue through 1997
and for several years into the future for those offices acquired many years ago
and which have sustained large losses in previous years. The levels of net
operating losses available to offset future taxable income are generally much
lower for the new offices opened in recent years.
Substantially all of the Company's deferred tax assets at December 31, 1996 and
1995 were comprised of net operating loss carryforwards for which the Company
has provided allowances. The ability of the Company to utilize these loss
carryforwards in the future is dependent on profitable operations in the various
countries in which loss carryforwards exist, and the specific rules and
regulations governing the utilization of such losses, including the dates by
which the losses must be used.
CAUTIONARY STATEMENT
The statements in this Management's Discussion and Analysis that are not based
on historical data are forward looking, including for example, information about
future sales growth in various countries in future periods; expected changes in
the levels of various expenses, including income taxes; the Company's plans for
future investments in new offices, services, or products; and financing plans
and expectations.
Forward looking statements contained in this Management's Discussion and
Analysis involve numerous risks and uncertainties that could cause actual
results to be materially different from estimated or expected results. Such
risks and uncertainties include, among many others, fluctuating foreign currency
exchange rates, changing levels of demand for the Company's services, the effect
of constantly changing general economic and political conditions in all of the
various countries in which the Company has operations, the impact of competitive
services and pricing, uncertainties caused by clients (including the timing of
projects and changes in the scope of services requested), or other risks and
uncertainties that may be disclosed from time to time in future public
statements or in documents filed with the Securities and Exchange Commission.
As a result, no assurance can be given as to future results.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
ALPNET, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31
Thousands of dollars 1996 1995
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,034 $ 1,033
Trade accounts receivable, less allowance of
$219 in 1996 and $156 in 1995 6,529 4,978
Work-in-process 487 340
Prepaid expenses and other 949 747
Total current assets 8,999 7,098
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Office facilities and leasehold improvements 318 144
Equipment 4,789 3,833
5,107 3,977
Less accumulated depreciation and
amortization 3,236 2,997
Net property, equipment and leasehold improvements 1,871 980
OTHER ASSETS:
Goodwill, less accumulated amortization of
$3,380 in 1996 and $2,924 in 1995 6,087 6,250
Other 310 121
Total other assets 6,397 6,371
TOTAL ASSETS $17,267 $14,449
</TABLE>
<TABLE>
<CAPTION>
ALPNET, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (continued)
December 31
Thousands of dollars and shares 1996 1995
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Notes payable to banks $ 1,959 $ 1,156
Accounts payable 2,225 1,636
Accrued payroll and related benefits 922 665
Other accrued expenses 897 813
Deferred revenue 391 254
Income taxes payable 53 18
Current portion of long-term debt 203 136
Guarantee liability 0 220
Total current liabilities 6,650 4,898
Long-term debt, less current portion 262 220
Commitments and contingencies (note 7)
SHAREHOLDERS' EQUITY:
Convertible Preferred Stock, no par value;
authorized 2,000 shares; issued and
outstanding 719 shares in 1996 and
1,131 shares in 1995 2,095 3,127
Common Stock, no par value; authorized
40,000 shares; issued and outstanding
17,883 shares in 1996 and 16,199
shares in 1995 40,228 38,954
Accumulated deficit (30,733) (31,329)
Equity adjustment from foreign currency translation (1,235) (1,421)
Total shareholders' equity 10,355 9,331
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $17,267 $14,449
See accompanying notes.
</TABLE>
<TABLE>
<CAPTION>
ALPNET, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Year Ended December 31
Thousands of dollars and shares 1996 1995 1994
<S> <C> <C> <C>
SALES OF SERVICES $32,338 $26,919 $20,473
OPERATING EXPENSES:
Cost of services sold 25,256 21,027 16,952
Selling, general and administrative expenses 5,539 4,361 3,491
Development costs 226 170 124
Amortization of goodwill 360 387 351
Total operating expenses 31,381 25,945 20,918
OPERATING INCOME (LOSS) 957 974 (445)
Interest expense, net 138 193 204
Income (loss) before income taxes 819 781 (649)
Income taxes 223 160 92
NET INCOME (LOSS) $ 596 $ 621 $ (741)
Net income (loss) per share $ .03 $ .03 $ (.04)
Weighted average shares of Common Stock
and Common Stock equivalents outstanding 23,742 23,155 17,235
See accompanying notes.
</TABLE>
<TABLE>
<CAPTION>
ALPNET, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Equity
Adjustment
from Foreign
Preferred Stock Common Stock Accumulated Currency
Thousands of dollars and shares Shares Amount Shares Amount Deficit Translation Total
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT JANUARY 1, 1994 459 $1,151 15,562 $38,274 $(31,209) $(2,127) $ 6,089
Issuance of Preferred Stock in exchange
for long-term debt to affiliates,
net of costs of $25 585 1,743 1,743
Costs related to 1993 issuance of
Common Stock (8) (8)
Adjustment to guarantee liability (420) (420)
Net loss (741) (741)
Foreign currency translation adjustment 514 514
BALANCES AT DECEMBER 31, 1994 1,044 2,894 15,562 37,846 (31,950) (1,613) 7,177
Issuance of Preferred Stock in exchange
for long-term debt to affiliate,
net of offering costs of $1 87 242 242
Issuance of Common Stock for cash,
net of offering costs of $6 582 194 194
Exercise of stock options 55 44 44
Costs related to 1994 issuance of
Preferred Stock (9) (9)
Adjustment to guarantee liability 870 870
Net income 621 621
Foreign currency translation adjustment 192 192
BALANCES AT DECEMBER 31, 1995 1,131 3,127 16,199 38,954 (31,329) (1,421) 9,331
Conversion of Preferred Stock to
Common Stock (412) (1,032) 1,235 1,032
Exercise of stock options 449 22 22
Adjustment to guarantee liability 220 220
Net income 596 596
Foreign currency translation adjustment 186 186
BALANCES AT DECEMBER 31, 1996 719 $2,095 17,883 $40,228 $(30,733) $(1,235) $10,355
See accompanying notes.
</TABLE>
<TABLE>
<CAPTION>
ALPNET, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Year Ended December 31
Thousands of dollars 1996 1995 1994
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 596 $ 621 $ (741)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization of property, equipment
and leasehold improvements 463 362 319
Amortization of goodwill 360 387 351
Other (178) 75 (69)
Changes in operating assets and liabilities:
Trade accounts receivable (1,475) (523) (690)
Accounts payable and accrued expenses 931 (23) 426
Other (160) 334 (202)
Net cash provided by (used in) operating activities 537 1,233 (606)
INVESTING ACTIVITIES:
Purchase of property, equipment and leasehold improvements (1,403) (395) (491)
FINANCING ACTIVITIES:
Proceeds from notes payable to banks 744 264 245
Principal payments on notes payable to banks (71) (582) (78)
Proceeds from long-term debt 294 54 321
Principal payments on long-term debt (137) (133) (59)
Sale of Common Stock for cash, net of related costs 0 194 (8)
Proceeds from exercise of stock options 22 44 0
Net cash provided by (used in) financing activities 852 (159) 421
Effect of exchange rate changes on cash 15 10 8
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1 689 (668)
Cash and cash equivalents at beginning of year 1,033 344 1,012
CASH AND CASH EQUIVALENTS AT END OF YEAR $1,034 $1,033 $ 344
CASH PAID DURING THE YEAR FOR:
Interest $139 $198 $222
Income taxes 199 114 71
See accompanying notes.
</TABLE>
ALPNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996
1. SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
ALPNET, Inc. (the "Company") is a United States publicly-owned multinational
corporation. The Company provides language translation, product localization,
and multilingual publishing services to businesses engaged in international
trade. The principal markets for the Company's services are North America,
Western Europe, and Asia.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of ALPNET, Inc. and
its wholly-owned subsidiaries or branches located in the United States, Canada,
United Kingdom, Ireland, Germany, France, Spain, the Netherlands, Belgium,
Switzerland, Hong Kong, Singapore, Korea, China and Japan. Significant
intercompany accounts and transactions have been eliminated in consolidation.
For all of the Company's foreign subsidiaries, the functional currency has been
determined to be the local currency. Accordingly, assets and liabilities are
translated at year-end exchange rates, and operating statement items are
translated at average exchange rates prevailing during the year. The resultant
cumulative translation adjustments to the assets and liabilities are recorded as
a separate component of shareholders' equity. Exchange adjustments resulting
from foreign currency transactions are included in the determination of net
income. A loss of $121,000 was recognized in 1996. Such amounts were
immaterial in 1995 and 1994.
In accordance with Statement of Financial Accounting Standards No. 95,
"Statement of Cash Flows," cash flows from the Company's foreign subsidiaries
are calculated based upon the local currencies. As a result, amounts related to
assets and liabilities reported on the statements of cash flows will not
necessarily agree with changes in the corresponding balances on the balance
sheets.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. Actual results
could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers cash equivalents to be all highly liquid investments with
a maturity of three months or less when purchased. Cash equivalents are stated
at cost, which approximates fair value.
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements are recorded at cost.
Depreciation and amortization are calculated using the straight-line method over
estimated useful lives of 3 to 5 years for equipment and 3 to 25 years for
office facilities and leasehold improvements.
GOODWILL
Goodwill consists of the excess of the purchase price over the fair value of net
assets of purchased subsidiaries and is amortized on the straight-line method
over 12 to 25 years. The Company periodically reviews goodwill for impairment
by comparing undiscounted projected income over the remaining amortization
period for each acquired subsidiary to the unamortized balance of goodwill for
each subsidiary. No impairments have been recorded for any of the years
presented.
REVENUE RECOGNITION
Revenue from services is recognized as work is performed. Clients are billed
according to the terms of purchase orders. Work-in-process represents costs on
incomplete and unbilled projects as well as revenues recognized in excess of
amounts billed. Deferred revenue arises when payments are received prior to
being earned under the terms of client purchase orders. Such revenue is
subsequently recognized as the requirements specified in the purchase orders are
completed.
Collateral is not required for receivables and reserves are provided for bad
debts.
STOCK OPTIONS
The Company continues to account for stock options using the intrinsic value
method and provides pro forma footnote disclosure of the impact of using the
fair value method.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is based upon the average shares of Common Stock and
Common Stock equivalents outstanding during the respective years, to the extent
they are dilutive. Common Stock equivalents include the Company's Preferred
Stock and employee stock options. These Common Stock equivalents were anti-
dilutive for certain quarters in 1994 and 1996. Primary and fully diluted net
income (loss) per share are substantially the same for each year presented.
RECLASSIFICATIONS
Certain prior-year amounts have been reclassified to conform to the 1996
presentation.
2. GEOGRAPHICAL DATA
The following selected financial data summarizes the Company's domestic and
foreign operations for financial reporting purposes. Allocations of corporate
and country overheads to domestic and foreign operations are based upon the
Company's policies for financial reporting consistently applied during the
periods. Intercompany sales are normally billed on a margin-sharing basis. All
intercompany sales are eliminated in determining the totals.
<TABLE>
<CAPTION>
Thousands of dollars 1996 1995 1994
<S> <C> <C> <C>
Net sales:
United States $ 5,521 $ 2,463 $ 2,360
Canada 4,802 3,860 3,404
Europe 25,713 21,864 15,940
Asia 3,788 2,464 1,955
Eliminations (7,486) (3,732) (3,186)
$32,338 $26,919 $20,473
Income (loss) before income taxes:
United States $598 $107 $(337)
Canada 154 60 85
Europe 603 576 (408)
Asia (536) 38 11
$819 $781 $(649)
Identifiable assets:
United States $ 2,077 $ 1,419 $ 761
Canada 2,067 1,319 1,211
Europe 11,564 10,272 10,493
Asia 1,559 1,439 758
$17,267 $14,449 $13,223
</TABLE>
Sales to a single client in the computer industry accounted for 16%, 17% and 14%
of total revenues in 1996, 1995 and 1994, respectively. No other client
accounted for more than 10% of revenues in any year.
3. 1997 ACQUISITION
In January 1997, the Company acquired all of the outstanding stock of CompuType
Ltd., a U.K.-based provider of specialty desktop publishing and pre-press
services, in a transaction accounted for as a purchase. The acquisition cost of
approximately $550,000 was paid in cash, and exceeded the fair values of the net
assets acquired by approximately $400,000, which will be recorded as goodwill
and amortized on the straight-line method over 12 years. The acquisition was
financed primarily by (1) a 200,000 UK pound (approximately $320,000) unsecured
term loan with the Company's U.K. bank, repayable over 5 years, bearing interest
at approximately 9%; and (2) an increase of 100,000 UK pounds (approximately
$160,000) in the Company's credit facility with this bank. This credit facility
is described in more detail in note 4. CompuType's results of operations will
be included with the Company's consolidated financial results from February 1997
forward. CompuType's 1996 sales were approximately $1,400,000.
4. BORROWINGS
NOTES PAYABLE TO BANKS
Notes payable to banks consisted of the following at December 31:
<TABLE>
<CAPTION>
Thousands of dollars 1996 1995
<S> <C> <C>
Credit facility with a Canadian bank, interest at 6%,
collateralized by the accounts receivable of the
Canadian subsidiary, guaranteed by the Company $ 639 $ 70
Credit facility with a U.K. bank, interest at 9%,
collateralized by the assets of the U.K. subsidiary,
guaranteed by the Company 1,101 991
Unsecured credit facility with a German bank, interest at 9.25% 154 31
Credit facility with a Spanish bank, interest at 10.75%,
guaranteed by the Company's U.K. subsidiary 65 64
$1,959 $1,156
</TABLE>
All of the Company's credit facilities have variable interest rates. The
interest percentages shown are the actual rates at December 31, 1996. The
weighted average interest rate on notes payable to banks was 8.1% at December
31, 1996 and 10.1% at December 31, 1995. Most of the Company's credit
facilities are subject to annual renewals and the Company expects them to be
renewed on substantially the same terms as currently exist. Occasionally,
amounts borrowed under credit facilities are allowed to exceed maximum limits
for short periods of time. Due to the short-term nature of these notes, their
carrying values at December 31, 1996 are considered to approximate their fair
values.
The credit facility with the Canadian bank has a maximum limit of Canadian
$700,000 (approximately $510,000) at December 31, 1996, and intercompany debts
have been subordinated to the bank.
The credit facility with the U.K. bank has a maximum limit of 800,000 UK pounds
(approximately $1,370,000) at December 31, 1996. In January 1997, the limit was
increased to 900,000 UK pounds (approximately $1,540,000), in conjunction with
the CompuType acquisition described in note 3. Intercompany debts have been
subordinated to the bank. The note agreement requires the U.K. subsidiary to
maintain net equity of 750,000 UK pounds (approximately $1,280,000) and a 2:1
ratio of accounts receivable to outstanding borrowings under the facility.
The credit facility with the German bank has a maximum limit of DM 200,000
(approximately $130,000) at December 31, 1996. The Company also has a secured
credit facility with another German bank which has a maximum limit of DM 600,000
(approximately $390,000) at December 31, 1996. This facility was not utilized
at December 31, 1996 and 1995. Intercompany debts have been subordinated to the
bank.
The credit facility with the Spanish bank has a maximum limit of PTS 9.2 million
(approximately $70,000) at December 31, 1996.
The Company obtained a line of credit with a U.S. financial institution in
January 1997 which has a maximum limit of $500,000, bears interest at
approximately 9% and is collateralized by U.S.-based accounts receivable.
LONG-TERM DEBT
Long-term debt consisted of the following at December 31:
<TABLE>
<CAPTION>
Thousands of dollars 1996 1995
<S> <C> <C>
Mortgage with a bank in Spain payable in monthly installments
through May 1997, interest at 14% $ 9 $ 34
Obligations to financial institutions due at various dates through
1999, secured by certain equipment, with carrying values which
approximate outstanding debt balances, interest at 6.25% to 15.1% 359 175
Unsecured note payable to the former owner of the Company's German
subsidiary, due in monthly installments of approximately $3 plus
interest through June 1999, interest at 8% 97 147
465 356
Less current portion 203 136
$262 $220
</TABLE>
The aggregate maturities of long-term debt as of December 31, 1996 were as
follows:
<TABLE>
<CAPTION>
Thousands of dollars
<S> <C>
Year Ending December 31
1997 $203
1998 171
1999 91
$465
</TABLE>
Based on a discounted cash flow analysis, the carrying values of long-term debt
at December 31, 1996 are considered to approximate their fair values.
5. CAPITAL STOCK
EQUITY TRANSACTIONS
In 1994, the Company completed a capital restructuring with three shareholders.
The agreements with these shareholders provided for (1) conversion of $1,807,000
of long-term debt ($1,743,000, net of related costs) due to two of the
shareholders into 584,257 shares of series C Convertible Preferred Stock; (2)
deferral of the due dates for repayment of a 300,000 Swiss franc (approximately
$243,000) note payable to a third shareholder who is also a director, which note
was converted in 1995 into 87,339 shares of series D Convertible Preferred
Stock; and (3) elimination of all of the outstanding warrants held by these
three shareholders to purchase up to 8,390,000 additional shares of the
Company's Common Stock. In conjunction with this capital restructuring, the
Company entered into a "financial monitoring agreement" with its largest
shareholder which requires the Company, among other things, to obtain prior
approval for major financing transactions, significant asset purchases or sale
of a major portion of the Company's assets.
In 1995, the Company issued 581,818 shares of restricted Common Stock to a new
vice president of the Company for approximately $194,000, net of related costs.
In conjunction with this transaction, the Company granted this officer an option
to acquire 500,000 shares of restricted Common Stock at an exercise price of
$.34375 per share, which was exercised in 1996.
In 1996, the Company issued 1,235,292 shares of Common Stock upon conversion of
411,764 shares of series B Convertible Preferred Stock. In March 1997, the
Company issued 652,035 shares of Common Stock upon conversion of 47,647 shares
of series B Convertible Preferred Stock and 56,566 shares of series C
Convertible Preferred Stock.
CONVERTIBLE PREFERRED STOCK
At December 31, 1996, the Company had 719,243 outstanding shares (615,030 shares
following the 1997 conversion described above) of Preferred Stock, of which
47,647 shares (0 shares following the 1997 conversion) are designated as series
B; 584,257 shares (527,691 shares following the 1997 conversion) are designated
as series C; and 87,339 shares are designated as series D. The series B
Preferred Stock, issued in 1991, was convertible at the option of the holder
into three shares of the Company's Common Stock, had voting rights as if the
shares were already converted, and featured a 10% non-cumulative dividend
subject to the discretion of the Board of Directors. The series C and series D
Preferred Stock is convertible at the option of the holder into nine shares of
the Company's Common Stock and otherwise has the same general terms as the
series B Preferred Stock.
COMMON STOCK
The Company is currently prohibited from paying dividends under Utah corporate
law.
STOCK OPTIONS
The Company has an incentive stock option plan and a nonstatutory stock option
plan whereby 136,577 and 1,063,423 shares, respectively, of the Company's
authorized but unissued Common Stock are reserved for ultimate issuance under
the plans. There was no activity nor any outstanding options under the
incentive stock option plan during any of the years presented. The following
table is a summary of activity for the Company's nonstatutory stock option plan
for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
Weighted-Average
Thousands of shares Shares Exercise Price Shares Shares
<S> <C> <C> <C> <C>
Outstanding at beginning of year 321 $ .93 830 888
Granted 112 1.82 154 31
Cancelled (29) .99 (608) (89)
Exercised (27) .81 (55) 0
Outstanding at end of year 377 $1.20 321 830
Exercisable at end of year 103 $ .88 83 430
Option price range per share:
Granted $1.38 to $2.92 $1.08 $.44
Outstanding at end of year $.42 to $2.92 $.42 to $1.13 $.42 to $1.13
</TABLE>
The exercise terms of the options provide that the options expire six years
after date of grant and cannot be exercised during the first year. No more than
20% of the options can be exercised in any one year; however, any unexercised
options may be accumulated and exercised in succeeding years. The exercise price
of options exercised during 1995 and 1996 ranged from $.42 to $1.13 per share.
The weighted-average remaining contractual life of options at December 31, 1996
was 4.1 years.
In addition to the above option grants, in 1995 the Board of Directors approved
the grant of stock options to nine members of management. Options to purchase
2,950,000 shares of restricted Common Stock were granted. In 1996, the
Company's shareholders approved an executive stock option plan to encompass
these stock options and permit registration of the stock set aside for issuance
with the Securities and Exchange Commission. The registration was completed
during 1996. The plan provides for no additional grants of options unless some
of the previously granted options are forfeited or terminated.
As of December 31, 1996, the options have the following terms and conditions:
983,333 optioned shares vest on June 1, 1998 and are exercisable at $.50 per
share; 983,333 optioned shares vest on June 1, 1999 and are exercisable at $.75
per share; and 983,334 optioned shares vest on June 1, 2000 and are exercisable
at $1.10 per share. All unexercised options expire on September 1, 2000 or when
the employee terminates employment with the Company, if sooner. Existing
options (for the purchase of approximately 450,000 shares of Common Stock)
previously granted to members of management participating in the new grants,
were voluntarily forfeited. The weighted average exercise price of these
options outstanding at December 31, 1996 and 1995 was $.78, and the weighted-
average remaining contractual life of the options at December 31, 1996 was 3.7
years.
If the Company had elected to account for options granted in 1996 and 1995 based
on their fair value, as prescribed by Statement of Financial Accounting
Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123"), net
income and earnings per share for 1996 and 1995 would have been reduced to the
pro forma amounts shown in the table below.
<TABLE>
<CAPTION>
Thousands of dollars 1996 1995
<S> <C> <C>
Reported net income $596 $621
Pro forma net income 392 447
Reported net income per share .03 .03
Pro forma net income per share .02 .02
</TABLE>
The fair value of each stock option grant was determined using the Black-Scholes
option pricing model and the following assumptions: expected volatility of 1.00,
risk free interest rate of 6%, expected lives ranging from three to five years,
and no dividends. The weighted average fair value of options granted in 1996
and 1995 was $1.18 and $.23, respectively. Because the method of accounting
for stock options as defined by SFAS 123 has not been applied to options granted
prior to January 1, 1995, the resulting pro forma compensation cost may not be
representative of that to be expected in future years.
6. INCOME TAXES
The Company files a consolidated U.S. Federal income tax return which includes
all domestic operations. Tax returns for states within the U.S. and for foreign
subsidiaries are filed in accordance with applicable laws. The following
summarizes for income tax purposes, the domestic and foreign components of
income (loss) before income taxes for the year ended December 31:
<TABLE>
<CAPTION>
Thousands of dollars 1996 1995 1994
<S> <C> <C> <C>
Domestic $1,887 $1,295 $ 807
Foreign (1,068) (514) (1,456)
$ 819 $ 781 $ (649)
</TABLE>
Income tax expense, including the effect of net operating loss carryforwards,
consisted of the following for the year ended December 31:
<TABLE>
<CAPTION>
Thousands of dollars 1996 1995 1994
<S> <C> <C> <C>
Current income tax expense:
Domestic income taxes:
Federal $ 20 $ 15 $ 5
State 70 65 45
Foreign income taxes 133 50 42
223 130 92
Deferred foreign income tax expense 0 30 0
Total income tax expense $223 $160 $92
</TABLE>
Income tax expense varied from the expected statutory domestic federal income
tax amount as follows for the year ended December 31:
<TABLE>
<CAPTION>
Thousands of dollars 1996 1995 1994
<S> <C> <C> <C>
Tax expense (benefit) on consolidated
income (loss) computed at the
domestic statutory federal income
tax rate $287 $273 $(227)
Effect of foreign losses on the
computation of tax expense
(benefit) at domestic statutory
rates 478 311 611
Utilization of U.S. net operating
losses from prior years (640) (438) (277)
Utilization of foreign net
operating losses from prior years (58) (123) (120)
Domestic state income taxes 70 65 45
Other 86 72 60
Reported income tax expense $223 $160 $ 92
</TABLE>
The approximate tax effect of the temporary differences that give rise to
significant portions of the deferred tax assets and liabilities are as follows
for the year ended December 31:
<TABLE>
<CAPTION>
Thousands of dollars 1996 1995 1994
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $7,400 $7,600 $8,700
Tax credit carryforwards 400 400 400
Other 200 100 100
Total deferred tax assets 8,000 8,100 9,200
Less valuation allowances (7,800) (8,000) (9,100)
Net deferred tax assets $ 200 $ 100 $ 100
Total deferred tax liabilities $ 200 $ 100 $ 100
</TABLE>
Due to prior years' operating losses, the Company and many of its subsidiaries
have net operating loss carryforwards available to offset future taxable income
in the various countries in which the Company operates. The U.S. parent
company has no net operating loss carryforwards for state income tax purposes.
The Company has approximately $400,000 of general business tax credit
carryforwards available to offset future U.S. federal income taxes which expire
beginning in 1997 through 2001.
The following table summarizes by country the significant available operating
loss carryforwards and the related expiration dates.
<TABLE>
<CAPTION>
Operating Loss Expiration
Thousands of dollars Carryforwards Dates
<S> <C> <C>
United States $15,200 1999 through 2003
Canada 300 1998 through 2003
Canada (capital loss carryforwards) 500 None
United Kingdom 1,400 None
Germany 1,800 None
France 400 1999 through 2001
Spain 900 1998 through 2003
Other 700 Various
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
Substantially all of the Company's office space and various equipment is rented
under leases which are classified as operating leases. These leases have
remaining terms of up to 18 years. Certain of the leases for office space
contain renewal options and adjustment clauses based on consumer price indices.
Total rental expense for all operating leases was approximately $1.6 million in
1996, $1.5 million in 1995 and $1.6 million in 1994.
Certain office space is subleased under an agreement pursuant to a contract
expiring in 1998 with various renewal options. Total sublease rental income was
approximately $80,000 in 1996, $220,000 in 1995 and $250,000 in 1994.
At December 31, 1996, future minimum payments under noncancelable operating
leases with initial terms of one year or more and future sublease income under
noncancelable subleases with initial terms of one year or more, are as follows:
<TABLE>
<CAPTION>
Lease Sublease
Thousands of dollars Payments Income
<S> <C> <C>
Year ending December 31
1997 $ 1,661 $ 86
1998 1,630 52
1999 1,514
2000 1,343
2001 1,251
Thereafter 4,587
Total minimum lease payments $11,986 $138
</TABLE>
EMPLOYEE BENEFIT PLANS
ALPNET, Inc. has a contributory profit sharing plan ("Plan") which is designed
to meet the requirements for qualification under Section 401(k) of the U.S.
Internal Revenue Code. Under this provision, contributions by U.S. employees are
excluded from taxable income. The Plan provides retirement benefits for U.S.
employees meeting certain eligibility requirements. Employer contributions,
which were immaterial for all years presented, are discretionary and become
fully vested after two years.
The Company's U.K. and Netherlands subsidiaries have defined contribution plans
which cover substantially all of their employees. Contributions are based upon
percentages of participating employees' compensation. The cost of these plans
was approximately $79,000 in 1996, $61,000 in 1995, and $57,000 in 1994.
CONTINGENT LIABILITY
In 1997, the Company's French subsidiary terminated certain of its employees,
some of whom have initiated legal actions in the appropriate French legal system
for handling employment-related matters. Certain other former employees may
also initiate similar actions in the future.
In 1996, approximately $50,000 of statutorily-required costs related to the 1997
terminations were expensed. If the employees who have initiated, or who may
initiate, legal action prevail in their claims, further costs, which have not
been accrued in the 1996 accounts, will be incurred.
The Company believes it has complied with all aspects of French labor
regulations in terminating the employees and intends to defend its actions
vigorously. While the ultimate outcome of the matters described above cannot be
determined, management, based on the opinion of its legal counsel, does not
expect that legal action will have a material adverse effect on the Company's
results of operations or financial position.
ACQUISITION GUARANTEE LIABILITY
In 1993, the Company recorded a guarantee liability for an unresolved matter
related to the purchase of its German subsidiary in 1988. The guarantee
liability amount fluctuated based on the trading value per share of the
Company's Common Stock. In May 1996, an increase in the market price of ALPNET
Common Stock allowed this liability to be fully satisfied without any additional
consideration being given.
8. RELATED PARTY TRANSACTIONS
Related party transactions not previously disclosed are as follows.
As of December 31, 1996, the Company has a $56,600 unsecured promissory note
receivable, bearing interest at prime plus 3%, from an officer and director of
the Company. The note balance was $67,200 at December 31, 1995 and $76,100 at
December 31, 1994.
The Company incurred legal costs of approximately $53,000 in 1994 for services
performed by a law firm whose Chairman of the Board was a director and also the
secretary of the Company during that year. Approximately $25,000 of these legal
fees related to financing transactions.
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
ALPNET, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of ALPNET, Inc. and
subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits. We did
not audit the financial statements of ALPNET Canada Inc., a subsidiary of
ALPNET, Inc., which statements reflect total assets constituting 12% as of
December 31, 1996 and 9% as of December 31, 1995, and total revenues
constituting 14% in 1996, 13% in 1995 and 17% in 1994 of the related
consolidated totals. Those statements were audited by other auditors whose
report has been furnished to us, and our opinion, insofar as it relates to data
included for ALPNET Canada Inc., is based solely on the report of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of ALPNET, Inc. and subsidiaries at December
31, 1996 and 1995, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
\s\ERNST & YOUNG LLP
Salt Lake City, Utah
March 21, 1997
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information with respect to directors required by Item 10 of Form 10-K is
presented in the section titled "Information About Directors" in the Company's
definitive Proxy Statement dated March 31, 1997 and is incorporated herein by
reference. The information with respect to Executive Officers is presented in
the section titled "Information About Directors" and in paragraph 7 of the
section titled "Certain Significant Employees" in the Company's definitive Proxy
Statement dated March 31, 1997 and is incorporated herein by reference. The
information with respect to other significant employees is presented in the
section titled "Certain Significant Employees" in the Company's definitive Proxy
Statement dated March 31, 1997 and is incorporated herein by reference.
ITEM 11: EXECUTIVE COMPENSATION
Information required by Item 11 of Form 10-K is presented in the sections titled
"Compensation of Directors," "Executive Compensation" and "Compensation Pursuant
to Plans" in the Company's definitive Proxy Statement dated March 31, 1997 and
is incorporated herein by reference.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by Item 12 of Form 10-K is presented in the sections titled
"Principal Shareholders" and "Information About Directors" in the Company's
definitive Proxy Statement dated March 31, 1997 and is incorporated herein by
reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by Item 13 of Form 10-K is presented in the section titled
"Certain Relationships and Related Transactions" in the Company's definitive
Proxy Statement dated March 31, 1997 and is incorporated herein by reference.
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) (1) FINANCIAL STATEMENTS:
The financial statements are included in Item 8, Financial Statements and
Supplementary Data, as listed in the following index:
Index to Consolidated Financial Statements: Page
Consolidated Financial Statements:
Balance Sheets as of December 31, 1996 and 1995
Statements of Operations for the years ended December 31, 1996,
1995 and 1994
Statements of Shareholders' Equity for the years ended December 31,
1996, 1995 and 1994
Statements of Cash Flows for the years ended December 31, 1996,
1995 and 1994
Notes to Consolidated Financial Statements
Report of Independent Auditors
(2) FINANCIAL STATEMENT SCHEDULES:
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required
under the related instructions and therefore have been omitted, or are not
presented because the information required is included in the financial
statements or notes thereto.
(3) LISTING OF EXHIBITS:
<TABLE>
<CAPTION>
Exhibit Filing
No. Description Status
<S> <C> <C>
3.1 Restated Articles of Incorporation, as Amended (iii)
3.2 By-Laws (v)
4.1 Specimen Series B Preferred Stock Certificate (iii)
4.2 Specimen Series C Preferred Stock Certificate (iii)
4.3 Specimen Series D Preferred Stock Certificate (iii)
10.1 Stock Purchase Agreement between ALPNET, Inc. and Benitex A.G.
dated 1 July 1993, with Exhibits (i)
10.2 Debt Conversion Agreement dated 31 March 1994 between ALPNET, Inc.
and H.F. Boeckmann, II (ii)
10.3 Debt Conversion Agreement dated 31 March 1994 between ALPNET, Inc.
and NFT Ventures, Inc. (ii)
10.4 Debt Conversion Agreement dated 17 August 1995 between
Michael F. Eichner and ALPNET, Inc. (iii)
10.5 Stock Purchase and Sale Agreement dated 20 October 1995 between
ALPNET, Inc. and Jaap van der Meer (iii)
10.6 Financial Monitoring Agreement dated 31 March 1994 between
H.F. Boeckmann, II and ALPNET, Inc. (iv)
10.7 First Amendment to Financial Monitoring Agreement dated
15 September 1995 between H.F. Boeckmann II, and ALPNET, Inc. (iv)
10.8 Specimen Executive Stock Option Agreement dated 17 August 1995 (iv)
11 Statement Re: Computation of Per Share Earnings (vi)
21 Subsidiaries of Registrant (vi)
23.1 Consent of Ernst & Young LLP, Independent Auditors (vi)
23.2 Consent of Friedman & Friedman, Independent Auditors for ALPNET Canada Inc. (vi)
27 Financial Data Schedule (vi)
99 Opinion of Friedman & Friedman, Independent Auditors for ALPNET Canada Inc. (vi)
(i) Previously filed on March 30, 1994 as an Exhibit to Form 10-K for the year ended December 31, 1993, and
incorporated herein by reference.
(ii) Previously filed on March 29, 1995 as an Exhibit to Form 10-K for the year ended December 31, 1994, and
incorporated herein by reference.
(iii) Previously filed on November 13, 1995 as an Exhibit to Form 10-Q for the quarterly period ended September 30,
1995, and incorporated herein by reference.
(iv) Previously filed on March 28, 1996 as an Exhibit to Form 10-K for the year ended December 31, 1995, and
incorporated herein by reference.
(v) Previously filed on August 13, 1996 as an Exhibit to Form 10-Q for the quarterly period ended June 30, 1996,
and incorporated herein by reference.
(vi) Filed herewith.
</TABLE>
(B) REPORT ON FORM 8-K:
The following report on Form 8-K was filed during the fourth quarter of
the year ended December 31, 1996, which is incorporated herein by
reference:
Financial
Date of Statements
Report Item Reported Filed
November 1, 1996 ALPNET Announces Third Quarter 1996 Results N/A
(C) EXHIBITS:
The response to this portion of Item 14 is submitted as a separate section
of this report. See Item 14(a)(3) above.
(D) FINANCIAL STATEMENT SCHEDULES:
The response to this portion of Item 14 is submitted as a separate section
of this report. See Item 14(a)(2) above.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ALPNET, INC.
By: \s\ Thomas F. Seal
Thomas F. Seal, President
Date: 24 March 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
\s\ Michael F. Eichner Chairman of the Board of Directors 24 March 1997
Michael F. Eichner
\s\ Thomas F. Seal President, Chief Executive Officer 24 March 1997
Thomas F. Seal and Director
\s\ John W. Wittwer Executive Vice President and Director 24 March 1997
John W. Wittwer
\s\ Jaap van der Meer Vice President Sales and Marketing 24 March 1997
Jaap van der Meer and Director
\s\ D. Kerry Stubbs Chief Financial and Accounting Officer 24 March 1997
D. Kerry Stubbs
E X H I B I T 1 1
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Thousands of dollars and shares 1996 1995 1994
<S> <C> <C> <C>
Net income (loss) $596 $621 $(741)
Weighted average shares of
Common Stock outstanding 16,659 15,783 15,562
Shares of Common Stock issuable
upon conversion of Convertible
Preferred Stock (2) 5,567 6,929 1,673
Shares of Common Stock issuable
upon exercise of employee
stock options (2) 1,516 443 0
Total shares of Common Stock and
Common Stock equivalents 23,742 23,155 17,235
Net income (loss) per share $.03 $.03 $(.04)
<FN>
(1) Primary and fully diluted per share earnings (loss) are substantially the same for each year presented.
(2) Common Stock issuable upon conversion of Preferred Stock and upon exercise of employee stock options was
anti-dilutive for certain quarters in 1996 and 1994.
</FN>
</TABLE>
E X H I B I T 2 1
LIST OF SUBSIDIARIES OF THE COMPANY
All subsidiaries are wholly-owned.
<TABLE>
<CAPTION>
Date of
Place of Incorporation
Name Incorporation or Acquisition
<S> <C> <C>
Automated Language Processing Systems, Ltd. Canada November 17, 1986
a.l.p. Services, Inc. Utah, USA November 25, 1987
A.L.P. SERVICES SARL France November 30, 1987
INTERDOC SARL France November 30, 1987
Automated Language Processing Services, Ltd. England December 2, 1987
ALPNET GmbH Germany January 11, 1988
ALPNET Canada Inc. Canada January 15, 1988
Dr. W.D. Haehl GmbH Germany January 29, 1988
Interlingua Group Ltd. England March 31, 1988
ALPNET U.K. Ltd. England March 31, 1988
Interlingua S.L. Spain March 31, 1988
Interlingua Language Services Ltd. Hong Kong March 31, 1988
ALPNET Singapore Pte. Ltd. Singapore March 31, 1988
ALPNET Ireland Ltd. Ireland August 18, 1995
AOLI Network Technology Ltd. China December 12, 1995
ALPNET Netherlands BV The Netherlands February 12, 1996
ALPNET Belgium Belgium September 16, 1996
ALPNET Computype England January 31, 1997
Note: The Company's Korean and Japanese operations are branches of ALPNET, Inc.
</TABLE>
E X H I B I T 2 3.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-5404) pertaining to the 1981 Incentive Stock Option Plan and The 1983
Non-Statutory Stock Option Plan and in the Registration Statement (Form S-8 No.
333-06091) pertaining to the 1996 Executive Stock Option Plan of ALPNET, Inc.
and subsidiaries of our report dated March 21, 1997, with respect to the
consolidated financial statements of ALPNET, Inc. and subsidiaries included in
the Annual Report (Form 10-K) for the year ended December 31, 1996.
\s\ ERNST & YOUNG LLP
Salt Lake City, Utah
March 21, 1997
E X H I B I T 2 3.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-5404) pertaining to the 1981 Incentive Stock Option Plan and the 1983
Non-Statutory Stock Option Plan of ALPNET, Inc. and subsidiaries, and in the
Registration Statement (Form S-8 No. 333-06091) pertaining to the ALPNET, Inc.
1996 Executive Stock Option Plan, of our Auditors' Report dated February 10,
1997 with respect to the balance sheets of ALPNET Canada Inc. (formerly
Multiscript Inc.) as at December 31, 1996 and 1995 and the statements of
earnings, deficit and changes in financial position for each of the years ended
December 31, 1996, 1995 and 1994, which we have been advised is included in this
Annual Report (Form 10-K) of ALPNET, Inc. for the year ended December 31, 1996.
\s\FRIEDMAN & FRIEDMAN
Chartered Accountants
Montreal, Quebec
March 21, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995
AND 1994 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995 DEC-31-1994
<PERIOD-END> DEC-31-1996 DEC-31-1995 DEC-31-1994
<CASH> 1034 1033 344
<SECURITIES> 0 0 0
<RECEIVABLES> 6748 5134 4436
<ALLOWANCES> 219 156 108
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 8999 7098 5610
<PP&E> 5107 3977 3612
<DEPRECIATION> 3236 2997 2682
<TOTAL-ASSETS> 17267 14449 13223
<CURRENT-LIABILITIES> 6650 4898 4423
<BONDS> 262 220 1623
0 0 0
2095 3127 2894
<COMMON> 40228 38954 37846
<OTHER-SE> (31968) (32750) (33563)
<TOTAL-LIABILITY-AND-EQUITY> 17267 14449 13223
<SALES> 32338 26919 20473
<TOTAL-REVENUES> 32338 26919 20473
<CGS> 25256 21027 16952
<TOTAL-COSTS> 25256 21027 16952
<OTHER-EXPENSES> 586 557 475
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 138 193 204
<INCOME-PRETAX> 819 781 (649)
<INCOME-TAX> 223 160 92
<INCOME-CONTINUING> 596 621 (741)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 596 621 (741)
<EPS-PRIMARY> .030 .030 (.040)
<EPS-DILUTED> .030 .030 (.040)
</TABLE>
E X H I B I T 9 9
OPINION OF FRIEDMAN & FRIEDMAN,
INDEPENDENT AUDITORS FOR ALPNET CANADA INC.
To the Shareholder of
ALPNET Canada Inc.
We have audited the balance sheets of ALPNET Canada Inc. as at December 31, 1996
and 1995 and the statements of earnings, deficit and changes in financial
position for each of the years ended December 31, 1996, 1995 and 1994. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance as to whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Company as at December 31, 1996 and 1995
and the results of its operations and the changes in its financial position for
each of the years in the three year period ended December 31, 1996 in accordance
with generally accepted accounting principles.
\s\FRIEDMAN & FRIEDMAN
Chartered Accountants
Montreal, Quebec
February 10, 1997
